The IRS can waive penalties it assessed against you or your business if there was “reasonable cause” for your actions. The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:
- Filing of returns
- Payment of tax
- Accuracy of information
Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.
Here are three instances where you might qualify for reasonable cause relief:
- Your or an immediate family member’s death or serious illness, or your unavoidable absence
- Inability to obtain necessary records to comply with your tax obligation
- Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance
Here are five instances where you likely do not qualify for reasonable cause penalty relief:
- Made a mistake.
- You forgot.
- You relied on another party to comply on your behalf.
- Don’t have the money.
- Ignorant of the tax law.
How to Request Reasonable Cause Penalty Relief
You can make a request for reasonable cause penalty relief either by filing a letter or by using Form 843. If you received an IRS notice informing you of a change to an item on your tax return, you should follow the instructions on the notice.
When evaluating a request for penalty relief, a key aspect that the IRS considers is the extent of your effort to pay your tax payment or to fulfill your filing obligation. You should prepare a compelling justification proving that you exercised ordinary business care and prudence, but factors beyond your control prevented you from meeting your tax obligations.
Be sure to correlate the dates and explanations corresponding to the events on which the IRS based the penalties. Describe the steps you took to become compliant once the event that created your reasonable cause was over.
While you can sometimes make your request orally, a written request better enables you to present a persuasive, coherent, well-organized argument. And with the written request, you can attach supporting documents.
Remember to include your name and Social Security number (or employer identification number if a business) on each page of your correspondence to the IRS.
If you would like to discuss IRS penalty relief, please don’t hesitate to call me on my direct line at 509-543-7600 or HERE.
February 2021
This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. TaxMedics does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. Please contact us directly to discuss how this information may be used based on your actual facts and circumstances.